Displaying items by tag: direct indexing

Direct indexing allows investors to access the individual stocks in their portfolio, providing opportunities for tax-loss harvesting. Unlike index funds, direct indexing offers the performance and diversification benefits of an index but with the ability to customize holdings. 

This strategy enables investors to manage exposure to specific companies or sectors and capitalize on market dips for tax-loss opportunities. While index funds offer simplicity and tax efficiency, direct indexing takes these benefits a step further by allowing more personalized portfolio adjustments. 

However, setting up a direct indexing account can be costly and involves higher fees due to its active management. Despite this, the customization and tax benefits can be worthwhile for certain investors, especially those in higher tax brackets or with concentrated stock positions.

Finsum: With fees and minimums getting lower and lower, direct indexing is becoming an option for a wider audience.

Strategic inflection points often build up gradually before causing sudden change, reflecting the need for constant innovation and adaptation in business. Embracing technology, such as direct indexing can create efficiencies, scale operations, and enhance investment processes which is crucial for asset managers. 

Understanding and meeting complex client demands, especially in retail, is essential as clients seek value, not just investment vehicles. The rise of ETFs and SMAs shows the importance of offering cost-effective, customizable solutions, while active management must justify its value in a fee-compressed environment. 

Indexing and alternatives have gained traction due to their reliable and affordable returns, but asset managers must continue to adapt and price their offerings appropriately. Ultimately, leveraging technology and maintaining a client-centric focus are key to navigating disruption and ensuring long-term success.

Finsum: Direct indexing should really be thought of as alpha that is on the table ready to deliver to clients that can afford the sizeable investment. 

The Bank of New York Mellon Corporation (BK) has introduced customized tax solutions and expanded its direct indexing suite, BNY Mellon Precision Direct Indexing. These offerings aim to help advisors align strategies with clients' investment goals, featuring tax transition management and tax overlay management through BNY Mellon Pershing X’s Wove platform.

 Advisors can now manage portfolio migrations and apply ongoing tax overlay management to a customized set of assets. Stephanie Hill, head of Index at Mellon, emphasized that these enhancements aim to bring institutional-quality index management to retail investors in a tax-efficient manner. 

This initiative complements BNY Mellon’s long-term growth strategy, which includes launching new services, digitizing operations, and strategic acquisitions. The company has recently formed significant partnerships and made strategic divestitures to strengthen its market position.

Finsum: Built in features to explicitly manage tax efficiency can help advisors leverage the full potential of this underused technology. 

Direct indexing is increasingly popular as investors seek personalized options and lower costs. This method, which involves owning a representative sample of securities in an index, offers benefits like reduced costs, individual tax lot ownership, and increased tax efficiencies.

However, to fully realize these benefits, direct indexing should be implemented within a single multi-manager account (UMA) rather than standalone accounts. This approach allows for effective tax loss harvesting, consistent exposure to the reference index, and avoids disallowed losses due to wash sales. 

Managing a portfolio within a UMA also simplifies administration and enhances rebalancing and asset allocation efficiency. When switching firms, advisors can use UMAs to minimize capital gains taxes for clients by absorbing satellite holdings into the core direct index.

Finsum: We know the benefits of tax-alpha but these account types could give investors an additional edge.

A survey of 631 financial advisors conducted by RIA Channel and FTSE Russell reveals that 79% of financial advisors do not currently use or offer direct indexing, although nearly half plan to begin adoption within the next five years. 

The survey shows that direct indexing’s growth remains in its infancy despite more awareness among advisors and clients. It also shows that many advisors are unfamiliar with direct indexing and unprepared for the shift in wealth management towards more personalized offerings. 

Among the respondents who offer direct indexing, 64% cited ‘tax loss harvesting’, 56% noted ‘tax efficient transitions’, and 40% acknowledged 'reducing concentration risk’ as major benefits of the strategy. Notably, 34% of advisors don’t feel confident talking to clients about direct indexing, despite offering the service.

In fact, the survey shows that 28% of advisors “don’t understand the benefits over other investment options,” while 27% believe the same goals can be reached with a portfolio of ETFs, and 20% see it as equivalent to separately managed accounts. 

In terms of obstacles, 34% said there was a ‘lack of client demand’, and 29% noted a lack of ‘understanding and knowledge of direct indexing’. Other factors cited were an absence of ‘organizational focus’ and ‘cost’.

Clearly, more needs to be done to educate advisors about the opportunity embedded in direct indexing to provide a personalized experience and help clients optimize their tax situations.

Finsum: Direct indexing is becoming increasingly ubiquitous; however, there is still a big gap when it comes to education. Here are some insights from a recent survey on what is preventing some advisors from adopting the strategy.